Engineering Costs and Production Economics, 11 (1987) 125- 13 1 Elsevier Science Publishers B.V., Amsterdam - Printed in The Netherlands

125

COST AND PRICE INDICES

Norman Boyd

INDUSTRIAL FUELS

An earlier article [ 1 ] in this series dealt with prices paid by industrial users for electricity, gas and heavy fuel oil. The period covered was from 1977 to 1982 inclusive and was, in retro- spect, an important time for the oil industry. World-wide consumption, according to one publication [ 21 reached a peak in 1979 at 3,125 million tonnes and fell in succeeding years to 2,809 million tonnes in 1985. Despite this drop, consumption of primary energy, i.e. all commercially traded fuels, expressed in tonnes oil equivalent, increased steadily from 6,947 million tonnes in 1979 to 7,4 14 million tonnes in 1985. Consumption of natural gas, coal, nuclear energy and hydroelectricity all increased in this period. Consumption in the non-Communist world of oil products under four main heads; gasoline, middle distillates, fuel oil and ‘othtrs’ (LPG, lubricants, bitu- mens, etc.) all showed reductions from 1979 to 1985, the largest being in fuel oil which fell from 1,398 million in 1979 to 863 million tonnes in 1985.

Various reasons may be suggested for the fall in oil consumption in the 1980’s but probably the most important was the escalation in prices in the last two decades. In the 1970’s crude oil prices increased by a factor of about 10. In the Rotterdam market prices of heavy fuel oil rose from under US $20 per tonne in 1970 to around $70 in early 1974 and stayed around that level until late 1978. Throughout 1979 prices rose to $180 per tonne in December, then, after a slight fall, continued to rise through most of 1980, peaking at $235 per tonne in the fourth quarter. Prices fell again within a few months to around $170-180 at

which level it remained fairly constant until late 1984. In early 1985 the price rose to $190 per tonne and then fell sharply to $128 by the middle of the year. After another brief recov- ery the fall continued through the first half of 1986 to well below $100 per tonne.

The problems arising from rapidly changing dollar prices for crude oil and oil products were accentuated at times by fluctuations in the value of the U.S. dollar relative to other cur- rencies. Most of the European currencies were gaining strength vis-a-vis the U.S. dollar in the early 1970’s, and this helped these countries to offset in part the increases in dollar prices. Around 1979 most European currencies started to weaken and the effective prices of oil prod- ucts in Europe rose although dollar prices of some products actually fell. This situation per- sisted until mid- 1985 when the dollar started to weaken. As a result of the improving cur- rency exchange rates combined with the fall in dollar prices, heavy fuel oil in Germany and Netherlands in mid- 1986 cost about one-third of what it had cost two years earlier. It is not surprising that OPEC, the Organisation of Petroleum Exporting Countries, is now reported to be considering changing from the U.S. dollar to the Japanese yen as the currency to be used for pricing. It was OPEC which, after its formation in 1960, adopted the dollar to replace the pound sterling at a time when the latter currency was losing strength.

Natural gas prices are affected by changes in oil prices since they are tied in most countries to prices of crude oil or to one or several oil products. However gas prices are much stea- dier than are those of crude oil and its prod- ucts. One reason for this is that most suppliers of gas have a virtual monopoly and have con-

0167-188X/87/$03.50 0 1987 Elsevier Science Publishers B.V.

126

tracts, generally of up to twelve months, with their customers. Oil products on the other hand are normally sold in competition and, in Europe, prices in the Rotterdam market may change cargo-by-cargo. The oil buyer may switch, if he so wishes, from one source of sup- ply to another to obtain the most favourable terms. Quite apart from the monopoly posi- tion, the methods whereby fuel may be trans- ported and stored are much more restricted for gas than for oil and this in turn limits the extent to which the gas user may change suppliers.

Electricity prices too are affected by changes in the prices of gas and fuel oil when these are the fuels used in thermal power stations. Fuel costs form a very substantial element of gen- erating costs as figures for the U.K. thermal stations show (average cost in pence/KWH generated from previous twelve months to April 5 of each year): Year 1984 1985 Fuel cost 1.978 3.100 Total generating cost 2.348 3.461

For the earlier year coal was the main fuel used, the later year reflects the partial switchover to fuel oil during the coal miners’ strike. An examination of Table 1 will show that a coun- try, such as Italy, which is forced to import much of the fuel required for electrical gener- ation, compares unfavourably with Canada and Norway, each with large hydroelectric schemes, or France with its nuclear stations.

The prices listed in Table l-3 are mainly average prices paid by industry and are obtained by dividing the total annual cost for each of the fuels by the corresponding number of units consumed. All prices exclude value- added and sales taxes but include customs duties, energy taxes and the like, where appli- cable. It is essential however that the prices listed should be read in conjunction with the descriptive matter giving the bases for the prices and the possible regional and quantity variations.

The units used for the three fuels may be

converted approximately by assuming: Heat equivalent of 1 tonne heavy fuel

oil = 1.2 x 1 O4 KWH = 40 gigajoules (GJ) .

Electricity

Prices of electricity vary with changes in load and in load factor (LF). Unit costs for high loads and load factors are lower than for low loads and load factors, but the differentials are not the same in all countries. A sharply falling rate scale will result in prices for heavy loads at high load factors being considerably lower than average prices for industry as a whole. Belgium A unified national tariff system is in

operation. The prices are applicable to a 2.5 MW load at 60% LF. Add 10% for 500 KW load, deduct 10% for 10 MW load. Add 10% for 400/6 LF, deduct 5% for 80% LF.

Denmark Much of Denmark’s electric power is imported from Norway and Germany. Prices are for 500 KW at 60% LF, and exclude any electrical tax which may be lev- ied. For Copenhagen add up to 15% and for Nord Sjaelland deduct up to 15%, but these factors vary from year to year. Deduct 5% for 2.5 MW load. Add 5% for 40% LF.

France Electricite de France is responsible for all generation, distribution and sale of elec- tricity. Prices are applicable to 2.5 MW load at 60% LF. Add 15% for 500 KW load, deduct 10% for 10 MW load. Add 15% for 40% LF, deduct 10% for 80% LF.

German F.R. Prices are subject to federal state control and variations range rt 5% of national average. Prices are applicable to 2.5 MW load at 60% LF. Add up to 10% for 500 KW load, deduct up to 20% for 10 MW load. Add 20% for 40% LF, deduct 20% for 80% LF.

Italy Prices are now uniform throughout Italy, with tariffs fixed by C.I.P. Prices are appli- cable to 2.5 MW load at 60% LF. Add 5% for 500 KW load, deduct 15% for 10 MW load. Add 5% for 40% LF, deduct 5% for 80% LF.

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TABLE 1

Electricity: prices per KWH and indices ( 1980 = 100)

1980 1981 1982 1983 1984 1985 1986

Belgium Denmark France German F.R. Italy NetNetherlands U.K. Australia Canada Japan Norway Sweden U.S.A.

B.Fr. Ore Cent Pf. L. Cent

hnt Cent Yen iire be Cent

1.69 125 126 141 148 151 153 28.2 135 151 151 160 173 130 21.0 107 122 139 155 162 160

9.67 112 122 127 131 133 136 52.0 125 154 189 206 225 210p 11.8 123 126 122 118 117 91 2.7 116 127 128 128 133 135 2.82 115 154 174 183 188 198 1.93 113 132 141 145 152 156

19.6 110 111 111 111 111 105 7.79 115 131 139 149 160 172

15.2 105 107 115 125 145 151p 3.69 116 134 134 137 140 139

TABLE 2

GAS: prices per gigajoule and indices ( 1980 = 100)

1980 1981 1982 1983 1984 1985 1986

Belgium B.Fr. 110.0 128 193 213 235 240 159 Denmark D.Kr. 72.0 121 131 153 149 N.A. N.A. France F.Fr. 17.5 120 160 175 187 212 153 German F.R. DM 6.75 134 176 169 180 190 166 Italy L 3320 149 190 209 229 226 180~ Netherlands Fl. 7.3 128 170 163 174 163 118~ U.K. f 2.0 122 130 131 135 145 135 Canada C$ 2.09 128 156 175 174 176 165 Japan Yen 2430 108 108 106 102 100 100 U.S.A. us.% 2.65 118 143 158 156 147 135

TABLE 3

Heavy fuel oil: prices per metric tonne and indices (1980~ 100)

1980 1981 1982 1983 1984 1985 1986

Belgium B.Fr. 5300 138 154 165 206 190 76 Denmark D.Kr. 1130 142 146 150 176 160 80 France F.Fr. 800 136 157 174 216 208 117 German F.R. DM 350 139 131 133 158 151 67 Italy L. 150.000 152 155 170 215 220 89 Netherlands Fl. 380 143 135 139 169 158 71 U.K. f 93 120 126 139 166 167 85 Australia A% 154 124 136 152 164 N.A. N.A. Canada CS 119 132 163 179 191 198 130 Japan Yen 57.000 100 107 95 88 91 56 Norway N.Kr. 934 134 139 149 176 181 101 Sweden S.Kr. 1000 140 156 172 202 204 130 U.S.A. USS 175 120 112 103 105 98 60

128

Netherlands Prices are applicable to 2.5 MW load at 60% LF in Rotterdam area and in Noord-Holland. Deduct 25% for Noord- Brabant. Add up to 5% for 500 KW load, deduct up to 15% for 10 MW load. Add up to 15% for 40% LF, deduct 5% for 80% LF.

U.K. Prices are set by area boards, with regional variations within ? 10%. Average price is for 500 KW and 2.5 MW loads at 60% LF. Deduct 10% for 10 MW loads. Add 10% for 40% LF and deduct 5% for 80% LF. The Department of Energy publish average prices paid by 900 large users (excl. iron and steel) which are about 15% below those in Table 1.

Australia The figures approximate to those for 2.5 to 10 MW loads at 60% LF in Queens- land, and for these, loads and LF should be scaled by 0.8 for Victoria, 0.9 for South Aus- tralia, 1.1 for N.S.W. and 1.25 for Western Australia. However because of the different tariff systems in the various states, each of which has its own pricing authority, the average prices per KWH in the year to June 1985 were, relative to the tabulated figures, 1.3 in Western Australia, 1.23 in South Aus- tralia, 1.08 in Victoria, 0.98 in N.S.W., 0.92 in Queensland and 0.38 in Tasmania.

Canada Each province has its own price fix- ing authority and there is a wide variation in tariffs. Based on 1 MW load, these vary from - 25% in Alberta to + 100% in Prince Edward Island, with Ontario about the national average as tabulated, Quebec about 5% below and British Columbia about 10% below. The tabulated figures are for prices paid by all manufacturing industries, but figures are published (see Cat. 57-208) for 22 major industries. Typical ratios to national averages are: Primary metals 0.85 Chemicals and chemical products 0.95 Non-metallic mineral products 1.15 Metal fabricating 1.5

Norway Prices are averages, excluding energy taxes, for purchased energy by all industries

but many consumers produce power on their own account. Prices to the iron and steel industry are about 50%, and those to the aluminium and non-ferrous industries about 60%, of the all-industries prices. The top prices, paid by “other manufacturing indus- tries” (i.e. excluding the metals, chemical, paper and oil industries) are about twice the all-industries prices.

Sweden Prices are for purchased energy and exclude energy taxes. As in Norway, many consumers produce power on their own. On average, self-produced power costs about 75% of purchased power.

U.S.A. A regional breakdown of prices to industry was given in “Producer Prices - Price Indexes” in earlier years, showing variations of about 25% below national averages in the central States, to 15% above in the Pacific States and 30% above in New England. This analysis is not published now.

Gas

In most countries gas prices are set on two bases, one for ‘firm’ supplies and one for “interruptible” supplies, and the former price is about 10% higher than the latter in most EEC countries. The conditions attached to inter- ruptible supplies vary from country to country and may permit off-periods of days or of sev- eral months. The prices in Table 2 are averages for “firm” and “interruptible” supplies, unless otherwise stated. Belgium Prices are for firm supplies of 4 x 1 O5

GJ per year. Add up to 60% for 400 GJ and 30% for 4 x 1 O4 GJ, deduct 3% for 4~ lo6 GJ. Prices for varying degrees of interrupti- bility range up to 20% below prices in Table 2 in 1980 to 10% below in, 1984.

Denmark Prices are for manufactured gas supplied in the Copenhagen area and are for 400 GJ per year. Natural gas supply started in late 1964.

France Prices are applicable to loads of 4 X 1 O4 to 4 x 1 O6 GJ per year. Add 50% for 400 GJ.

129

Prices in the Toulouse area are about 5% below those tabulated.

German F.R. Prices are applicable to supplies in the Hamburg area for about 4~ lo4 GJ per year. Add 20% for 400 GJ and deduct 5% for 4x lo5 loads and upwards. Regional differences, relative to Hamburg prices, are approximately + 15% to - 5%.

Italy Gas prices are now unified in Italy. Prices are applicable to offtakes of 4x lo5 GJ per year. For 400 GJ add 30% and for 4 x 1 O4 GJ add 2%, deduct 4% for 4 x 1 O6 GJ per year.

Netherlands Prices are applicable to supplies in the Rotterdam area for 4x 10’ GJ per year. Add 13% for 400 GJ and 4% for 4 x 1 O4 GJ, deduct 5% for 4 x 1 O6 GJ per year.

U.K. Prices are applicable to offtakes of 4 x 10’ GJ per year. Add 10% for 4 x 1 O4 and deduct 10% for 4x lo6 GJ. Prices for off- takes below 4 x 1 O4 GJ have remained fairly static at about 10% above the 1980 industry average. The Department of Energy publish prices paid by 900 large users (excl. iron and steel) which were 15% in 1980 and 10% in 1984 below the prices in Table 2.

Canada As with electricity, there are substan- tial variations in prices to the different industries (see Cat. 57 - 208). Typical ratios to national averages in 1984 are pri- mary metals at + 10% and chemicals and chemical products at - 18%.

Japan Prices in Table 2 are for manufactured gas, made principally from LNG and LPG.

U.S.A. Regional differences are very large. In 198 1 against a national average of $3.16 per GJ, prices ranged from $1.24 in Alaska and $1.84 in Arkansas to $5.36 in Maine and $5.66 in Vermont.

Heavy Fuel Oil

As pointed out earlier, oil prices are quoted in U.S. dollars, hence currency exchange rates play a very important part in national prices for oil products. Another factor affecting fuel

oil prices in particular is the sulphur content. Legal limits on the permissible amount of sul- phur vary from one country to another, but there has been a general trend over the years to lower limits. Prices in Table 3 are for 2.5% S unless otherwise stated below. Belgium Fuel oil has been untaxed since 198 1. Denmark A storage fee is levied on fuel oil.

From July 1982 to May 1985 it amounted to D.Kr. 25 per tonne.

France Fuel oil carries a small tax which var- ies with time.

German F.R. Fuel oil has been untaxed since 198 1. Prices are for 2% S. For 1% S add 2.5%.

Italy Fuel oil carries a small tax. Prices are for 3-4% S. For 1% S add 10%.

Netherlands Prices include a small storage fee and are for max. 2% S.

U.K. Prices include duty of about &8 per tonne and are for 3-4% S. The Department of Energy publisheq prices paid by 900 large users (excl. iron and steel) and these are up to 4% below the tabulated figures.

Australia Add 10% to prices in Table 3 for 1% S.

Canada Prices are national averages for all industries. There are variations for individ- ual industries but these are smaller than for gas and electricity (see Cat. 57 - 208).

Japan Prices are for 3% S. Norway Prices are for 2.5% S and include

excise taxes, depending on sulphur content, levied as follows (N.Kr. per Tonne + for each 0.5% S above 0.5%): 1983 23.15 + 5 N.Kr. per Tonne 1984 25.25 + 6 N.Kr. per Tonne 1985 27.35 + 7 N.Kr. per Tonne 1986 29.05 + 8 N.Kr. per Tonne

Sweden Prices are for 1% S. Deduct 8% for 2.5% S up to Oct. 1, 1984 when max. limit of 1% S was imposed.

U.S.A. Prices are for S content not exceeding 1%. For content exceeding 1% S multiply by 1980 1981 1982 1983 1984 1985 1986

.79 .83 .82 .92 .93 .92 .80

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PRICE COMPARISON

Table 4 shows the relative prices for the three fuels with U.S.A. prices as 1.0 in each year. It points up several interesting features. For elec- tricity the advantages of hydroelectric schemes coupled with indigenous oil are reflected by the low prices in Canada and Norway. France has the lowest prices in the EEC countries largely because of its nuclear powered stations. For

TABLE 4

Fuel prices relative to U.S.A.*

gas, Canada’s prices remain low in comparison to others especially those of the U.S.A. which imports about 30% of the Canadian production.

The Netherlands and Norway continue to be major exporters of natural gas, but the U.S.S.R. has also become a major supplier to France, Italy and West Germany with a total of 25 x 1 O9 cu. metres in 1985, or almost 25% of their combined consumptions.

1980 1981 1982 1983 1984 1985 1986

Belgium

Denmark

France

German F.R.

Italy

Netherlands

U.K.

Australia

Canada

Japan

Norway

Sweden

I 1.57 1.35 0.97 0.95 0.85 II 1.43 1.24 1.26 1.11 1.07 III 1.04 0.95 0.93 0.96 1.02 I 1.37 1.28 1.04 0.94 0.86 II 4.87 4.01 3.02 2.89 2.49 III 1.15 1.10 1.02 1.03 1.05 I 1.36 0.99 0.79 0.77 0.73 II 1.58 1.27 1.13 0.96 0.90 III 1.09 0.98 0.98 1.01 1.07 I 1.42 1.14 1 .oo 0.97 0.87 II 1.38 1.32 1.31 1.07 1.02 III 1.11 1.05 0.97 1.01 1.05 I 1.61 1.34 1.21 1.31 1.20 II 1.43 1.41 1.24 1.17 1.04 III 0.98 0.96 0.89 0.93 1 .oo I 1.59 1.39 1.13 1.02 0.85 II 1.37 1.23 1.23 1 .oo 0.95 III 1.07 1.10 0.99 1.03 1.08 I 1.72 1.49 1.21 1.05 0.90 II 1.77 1.60. 1.20 0.94 0.86 III 1.25 1.09 1.05 1.08 1.10 I 0.89 0.87 0.90 0.89 0.89 III 1.02 1.05 1.09 1.17 1.20 I 0.45 0.43 0.41 0.45 0.43 II 0.68 0.72 0.70 0.71 0.68 III 0.58 0.63 0.80 0.96 0.96 I 2.45 2.31 1.80 1.87 1.81 II 4.23 3.85 2.85 2.61 2.50 III 1.50 1.24 1.28 1.27 1.14 I 0.43 0.37 0.32 0.30 0.28 III 1.07 1.06 1.04 1.05 1.09 I 0.97 0.74 0.53 0.46 0.45 III 1.34 1.32 1.28 1.24 1.33

0.85 1.17 1.01

0.91

1.13 1.09

1.03 0.88

- - 1.02 1.07

0.75 0.95 1.08 1.08

1.11 1.53 0.86 1.18

1.15 1.44 1.07 1.23

1.21 1.42~ 1.03 1.12p

1.04 1.01 0.82 0.85~

0.94 0.98~ 1.08 1.25

0.90 1.05 0.97 1.12

1.18 1.33 0.72 0.73

N.A. N.A. 0.42 0.42

0.70 0.70 1.02 1.06

1.81 2.35 2.70 4.02

1.30 2.14 0.29 0.35

1.17 1.45 0.50 0.63~

1.41 2.07

I - Electricity, II - Gas, III -Heavy fuel oil

131

APPENDIX

Sources of information on fuel costs

General

Australia

Belgium

Canada

Denmark France

German FR Italy Japan

Netherlands

Norway Sweden

U.K.

U.S.A.

REFERENCES

Energy Prices and Taxes - OECD, Paris Bulletin of Energy Prices - Eurostat, Paris Yearbook of World Energy Statistics - U.N., New York Australia Energy Statistics - Dept. of National Development and Energy, Canberra The Electricity Supply Industry in Australia - Electricity Supply Association of Australia Annuaire Statistique de 1’Industrie du Gaz - Fedederation de 1’Industrie du Gaz Statistique Electricite - Administration de 1’Energie Consumption of purchased fuel and electricity (Cat.

57 - 208) Dept. of Energy, Mines

Electric Power in Canada (Cat. M23 -7) 1 and Resources, Ottawa

Consumer Prices and Price Indexes Gas Utilities

1

Statistics Canada, Ottawa Industry Price Indexes (Cat. 62 - 0 11) Dans Elforsyning - Danish Association of Electricity Supper Undertakings Bulletin Mensuel de Statistique - INSEE Statistiques - Gaz de France Statistik der Energiewirtschaft - V.I.K. Bollettino Mensile - Istituto Centrale di Statistica Price Indices Annual - Bank of Japan The Daiwa Economic and Industrial Indicators Maandstatistiek van de Prijzen

1

Centraal Bureau van de de Nederlandse energiehuishouding Statistiek Elektrisitets - Statistikk - Central Bureau of Statistics, Oslo Statistiska Meddelanden, Series E - National Central Bureau of Statistics, Stockholm Digest of U.K. Energy Statistics - H.M. Stationery Office, London Electricity Supply Statistics - The Electricity Council, London Gas Facts - The American Gas Association, Arlington, VA Monthly Energy Review - U.S. Dept. of Energy, Washington DC Producer Prices and Price Indexes - U.S. Dept. of Labor

[ I] Engineering Costs and Production Economics, 7(4) (1984): 249-255.

[2] BP Statistical Review of World Energy. British Petro- leum Ltd., London, ECZY 9BU.